Sipps: Coming of age
The definition of a Sipp needs to be re-evaluated, as the industry has grown and evolved
Sipps are on the brink of turning 21 and, while the industry has proliferated, the nature of the ‘Sipp’ brand has become clouded.
The first Sipp was launched in 1989 as a personal pension version of the popular small self-administered scheme (Ssas). A growth spurt occurred in 1995 when deferral of annuity purchase was introduced, and another one followed ‘A-Day’ in 2006.
Since its introduction, the definition of a genuine Sipp has been one that permits the full range of investment options allowed by HM Revenue & Customs (HMRC). This is where the term ‘self-invested’ originated and why many say it should remain.
HMRC, whose term for a Sipp is a “member-directed pension scheme”, has a list of allowable (tax-exempt) investments in which UK pension schemes can invest, and the principle of self-investment is that a Sipp can utilise any of these.
It was on this principle that a number of the most well-known Sipp providers flourished, helping the industry evolve from a small cottage industry into today’s mass market, with more than £50bn under management.
The success of this sector is almost unprecedented in the current financial services environment, and many providers have jumped on the bandwagon. The result is an industry that looks somewhat different now.
Starting with the Sipps that could be considered counterfeit, there are the single-asset-class products that allow access to a range of investments, but only within the same asset class: for example, a fund platform permitting a range of unit trusts and Oeics, or a stockbroker account allowing access to a share-dealing service.
Then there is a hybrid product usually offered by insurance companies, consisting of their core range of insured funds – at a headline fee – with a secondary or tertiary range of investment choices that come with additional fees.
At the top level is the full or genuine Sipp, which allows access to all of the HMRC-permitted investment choices, usually for a flat fee.
Why is this a problem to both advisers and their clients? Because clients who buy Sipps, believing they have bought a product that allows all Sipp options, will be disappointed to find out later that it doesn’t.
There have been hundreds of cases where IFAs have been told by their clients’ Sipp providers that particular but perfectly allowable investments are not accepted, leaving the only option to transfer the funds to a provider that would allow investments. This could lead to accusations of mis-selling.
Group Sipps, which have existed as long as the original version, are also popular. Confusingly, there are two types that fit the description.
The first, more accurately described as a syndicated Sipp, is best suited to individuals pursuing a common investment purpose. The classic example of this type of Sipp is the partners of a firm who club together to buy the business premises, which are then leased back to the company. The allocation of the property and rental income (and mortgage, if there is one) between the individuals’ Sipps is usually recorded by a declaration of trust.
